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Pension consolidation is when you combine all of your old pensions into one single pension pot.
These days it’s common to have a number of pensions with different providers, often as a result of working for several different companies throughout your career. More often than not, when you leave a job, you leave that workplace pension where it is. Many people also have various private pensions, built up with more than one provider.
Approaching retirement is one of the most important times when you need to be looking at and reviewing your pension, and when you do one of the biggest jobs will be considering whether you should be consolidating your pensions.
Although it is when approaching retirement that most people begin to think about their pensions there is just as much reason and benefit to regularly reviewing pension arrangements over your working life. Pension growth happens over decades, and making sure that they are arranged in the best way from the start will help them to grow as much as they can over the years. Although your pot maybe smaller and you may only have a few pensions this doesn’t mean that it should all be left to retirement age.
This article highlights some of the benefits of pension consolidation, which can have a positive impact whether you’re still building up your pension or are getting ready to retire. Whilst there are some great benefits to consolidating your pensions there are also a few things it’s important to consider and check before you do, so please read right to the end.
Older style pensions usually have limitations on where your pension money can be invested. You usually only have the option of using the pension provider’s own investment funds.
There are 1,000’s of funds, stocks and other financial products in the world, and you want to choose the ones that are the best for you. But if you are restricted by your pension provider to only a small handful, it’s unlikely that they are the right ones for you! More choice doesn’t mean you have to get more investments, it just gives you a better chance of choosing the right one for you.
By consolidating your pensions you can access the whole of the market ensuring you have the best investment strategy for your retirement plans.
If you plan on taking some money out of your pension in the near future, but not all of it, then your older style pensions are unlikely to have the functionality to do this. As such you may want to transfer your pensions in order to give yourself greater choice and flexibility with your retirement savings.
Some schemes which were established before “Pension Freedoms” were introduced in 2015 may not have the flexible options that other newer pensions have. Income drawdown (also known as flexi-access drawdown) came into effect in 2015 and it allows you to access your pension savings whenever you need to from age 55 (increasing to 57 in 2028), while reinvesting your remaining funds in a way that is designed to provide an ongoing retirement income.
If you retain an older pension, when the time comes for you to access it, you might have to transfer it to another one in order to receive the benefits you are looking for. If you have never transferred your pensions before then it is likely the pensions you have are built for saving, not withdrawing. In order to get the full benefits of flexi-access drawdown (if appropriate for you) then you will need to transfer your funds to a pension that allows this feature.
One of the main potential benefits of consolidating your pensions is that there may be a reduction in charges. By consolidating your pensions you can use scale to reduce your overall charges.
This is particularly true of older style pensions which quite often have old fashioned charging models which can ultimately have higher costs. Today, most pension and investment platforms charge you less the more you invest.
Also, with some schemes, when the fund value of the pension goes above a certain amount, you get a discount which you may not qualify for if you spread the contributions across different providers.
Within your pension pot are a basket of investments, which you hope will grow over time to provide you with the income you need in retirement. To make the most out of your investments you will need an effective strategy on how, what and when you invest.
Your pension fund may have already decided on an investment strategy for you by default. For example, a common strategy used by pension funds is referred to as “life-styling” and it involves lowering the risk (and likely returns) of your portfolio as you come close to retirement age. However, this relies on the assumption that you will be taking out an annuity with all of your funds, something that is increasingly rare these days and so probably not in your best interest.
By consolidating into a pension provider of your choice you can make sure it offers the freedoms for you to use an investment strategy that is right for you, and not a one size fits all one. If your pensions are all in one place, it can help you to see if your underlying investment strategy is still the right one for you.
As part of the process of pension consolidation, a good Independent Financial Adviser can also help you to trace old and forgotten pensions from previous employers before you consolidate.
It is currently estimated that there are about 1.6 million lost pension pots in the UK which are worth a staggering £19.4 billion. These are mainly due to people moving jobs and homes over the years and losing track of them. Even small pension pots left over many years can grow to be substantial. It can be an easy way of boosting your pension by simply searching for lost pots that you can then consolidate or cash in.
Having lots of different pensions with different companies means receiving lots of different post/paperwork every year and having to contact multiple pension providers. Not only is this very time consuming to deal with (and it tends to get increasingly worse over the years), it also makes it difficult to keep track of what pensions you have, where they are and what is in them. Pension planning works best when you know what your entire pot is made up of, so you can make the right decisions.
With just one pension, it’s much easier to keep track of everything and not lose any pensions.
Pensions come with many benefits (such as tax relief), but these go hand in hand with restrictions and limits on how they can be used. These allowances restrict things like the amount you can put into a pension each year tax free, and the amount you can put in over a lifetime before you start incurring punitive penalties.
As discussed elsewhere in this article, one of the advantages of consolidating your pensions is that you have a lot less paperwork to keep track of. If you only receive statements for one plan, keeping track of things like your remaining allowances becomes a lot easier and also leaves a lot less room for expensive mistakes.
This is particularly useful if, for example, you decided to make a large, one-off contribution and to make use of your pension carry forward allowance. It could easily end up being a huge task if you have numerous pensions that you’ve been contributing to, because you have to contact each provider for information and you’ll be held back by the slowest one of them. Then you have the task of working out how much of your allowance you have used with whom and when, taking time and increasing the risk of an error and failing to use your allowances in the best way you can.
One of the main misconceptions about transferring all your pensions into one is that you will reduce your investment diversity, which is not necessarily true. Quite often, when we’ve spoken to clients and looked at all their pensions, we’ve seen that they’re not diversified at all because they’ve stayed in the ‘default’ funds offered by each provider and these are often very similar – for example, they might be all UK funds. If you find a provider with a good selection of funds, you can have a range of investments all held within the same plan.
In the same way that it is easier for you to deal with the administration of just one pension instead of multiple pensions, the same can also be said upon your death.
Leaving your estate with multiple pensions can make it more difficult to understand what pensions you had and where to locate them. Imagine how hard it is for yourself to think of where all your pensions and the paperwork are, then picture how difficult it would be for someone with little or no knowledge at all of your pension arrangements. Pensions can easily be lost as there is no way of a pension scheme automatically knowing if a pension member has passed away,
Consolidating your pensions also means you only have to complete one death benefit nomination form rather than trying to remember to complete them for lots of different pensions.
Consolidating pensions into one pot makes monitoring their investment performance much simpler.
Pension providers report past performance in several different ways and send these reports out at different times – one may come at the start of the year, another in the middle and another at the end.
If you’ve got only one pension, then you can better understand the performance of your underlying pension investments. This helps to find where you can improve, identify areas that are underperforming and help track your performance against your retirement goals. This advantage goes hand in hand with the other benefits mentioned in this article, such as more investment choice, to contribute to a greater overall increase in performance.
Hopefully by now you can see there is a strong case for consolidating your pensions. However, there are risks involved and it’s important to ensure you fully understand what type of pension you are giving up and any other consequences before you move it. Some of the risks to watch out for include:
Pensions mistakes can be expensive so it’s advisable to contact an Independent Pension Adviser for help if you are unsure.
This will be your first retirement, so you want to ensure it is done properly. If you need assistance making sense of it all we are happy to help.
Remember, you are in control of your pensions, you decide what you do with them.